The Power of Perspectives

The Canadian Bar Association

Yves Faguy

Why traditional firms will want re-regulation of the legal industry

February 20 2017 20 February 2017

 

Last year, Malcolm Mercer wrote about the various regulatory challenges in the U.S. and Canada with respect to innovation in the provision of legal services. He describes how protectionist pressures have put the breaks on any efforts to involve law societies (and the ABA in the U.S.) in facilitating new ways of providing legal services.  Then, casting an eye to the future, Mercer guesses that, ultimately, regulators will be forced to face the music one way or the other:

It seems to me inevitable and proper that new ways of providing legal services will be allowed in unserved and underserved areas. Whether Canadian law societies are up to the challenge of allowing this is unclear. But if they don’t, someone else will.

If encouraging the evolution of the existing practice of law with new forms of capital and expertise is not in the cards, permitting new entrants is the alternative. The question then will be how new entrants should be regulated and by whom.

For traditionalists, it seems to follow that the preferred approach would be the English approach; to allow new entrants in areas not currently well served and not to seek to have the law societies regulate them. In this way, existing legal practises and self-regulation are protected while innovation is encouraged where it is most needed. While ironic, the answer for those who wish to avoid competition from new entrants may be limited de-regulation.

For those who prefer to see traditional legal practices evolve to address unmet legal needs, there is also some value in this approach. New entrants in underserved areas will challenge those now providing services. This competition will cause evolutionary change for the incumbents. However, limiting access to capital and expertise to incumbents will limit the ability of the incumbents to evolve to face new challenges.

Mark A. Cohen has a post up advocating for re-regulation of the legal services industry (in the U.S., but his arguments are no less relevant to the Canadian marketplace).  He takes on the critics, many of who are traditional law firms, but who in his view would benefit from changing the rules on non-lawyer ownership as much as clients would:

An absence of equity—in the true sense of investment in the longer-term success of the enterprise—in law firms has yielded many of the problems that are now nails in the partnership model’s coffin. The list includes: peripatetic partners, firm instability, an inter-generational battle between older partners and younger ones, an acceleration and widening of disaggregation, and an erosion of the law firm franchise brand. These structural issues, coupled with the lack of investment capital and a reluctance to adopt technology and process— are among a growing list of reasons why law firms are losing market share to in-house legal departments and legal service providers. The latter groups are succeeding—at the expense of firms—in part because they attract top talent corporate with structures that offer long and short-term compensation, including equity. This means that lawyers and other legal delivery experts have an alignment with both the short and long terms success of the enterprise. And that promotes—among other things—stability and fosters innovation. It also encourages buyer and seller to adopt a relationship rather than a transactional approach to their interactions.

Jordan Furlong sees traditional firms quickly having to accept the reality that re-regulation is necessary to tap into much needed capital:

The growing army of alternative platforms and rival providers, emerging and competing with law firms in the legal market over the next several years, will bring with them financial resources an order of magnitude beyond what lawyer-only equity can provide. The gross revenue of the entire AmLaw 100 in 2015 was $83.1 billion. The Big 4 accounting firms’ revenue alone in 2015 was $123.5 billion. Throw in legal technology providers financed by colossal Silicon Valley venture funds, and the still-distant but inevitable entry into law of corporate giants like Google and Amazon. Law firms, as currently structured and financed, are going to be massively outgunned in the coming market, just as their sole source of capital with which to fund competitive efforts starts dwindling.

And that, among other effects, is what’s going to finally change the legal profession’s rules around non-lawyer ownership of law firms. Today, lawyers and bar groups are doing everything they can to oppose the legalization of non-lawyer law firm ownership. Within ten years’ time, they’ll be the ones leading the effort to authorize it, simply in order to level the playing field and keep lawyers and law firms alive in a marketplace full of richly financed providers. The days when lawyer capital constitutes the sole permissible type of law firm equity are drawing to a close.

 

Photo licensed under Creative Commons by Joe The Goat Farmer

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